Pareto-Improvements, Welfare Trade-Offs and the Taxation of Couples

Felix J. Bierbrauer (), Pierre Boyer, Andreas Peichl and Daniel Weishaar ()
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Felix J. Bierbrauer: University of Cologne
Daniel Weishaar: Ludwig-Maximilians-Universität München

No 349, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: We develop a theory of tax reforms for a setting with multi-dimensional heterogeneity amongst taxpayers and multiple economic decisions that are all subject to fixed and variable costs. The theorems in this paper provide a complete characterization of the conditions under which Pareto- or welfare-improving tax reforms exist. We focus on one application, the taxation of couples, and present a detailed analysis of the behavioral responses to taxation in this setting. Squaring the theorems with this analysis yields sufficient statistics for the existence of Pareto- or welfare-improving tax reforms. In the empirical part, we apply them to US data. Our findings include the following: Tax rates on secondary earnings are inefficiently high when secondary earnings are close to primary earnings. Also, reducing the tax system's degree of jointness is not Pareto-improving. Whether it raises welfare depends on a trade-off between poverty alleviation and gender balance.

Keywords: Taxation of couples; Pareto efficiency; tax reforms; optimal taxation; non-linear income taxation (search for similar items in EconPapers)
JEL-codes: C72 D72 D82 H21 (search for similar items in EconPapers)
Pages: 142 pages
Date: 2024-12
New Economics Papers: this item is included in nep-pbe and nep-pub
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https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_349_2024.pdf First version, 2024 (application/pdf)

Related works:
Working Paper: Pareto-Improvements, Welfare Trade-Offs and the Taxation of Couples (2024)
Working Paper: Pareto-Improvements, Welfare Trade-Offs and the Taxation of Couples (2024)
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